Why is ‘cheap’ a false economy?

Understandably everyone wants to save money, especially in these times, however we need to be aware of falling victim to false economy. False Economy is an expression that refers to an action which saves money at the beginning but which, over a longer period of time, results in more money being wasted than being saved.

For instance, I have never understood why some people will drive half an hour across town to get their petrol two cents a litre cheaper, all the while using up what they may save by driving across town, notwithstanding the time it took to travel there and back in the first place. In almost all cases this action delivers a net loss.

The concept of a false economy is similar to planned obsolescence, whereby the lower initial cost of a false economy attracts buyers mostly on the basis of low cost, who may later be at a disadvantage.

Motivating factors on the part of the party engaging in false economies may be linked to the long term involvement of this party. For example, a real estate developer who builds a condominium may turn the finished structure over to the ensuing condominium corporation which is run by its members once the last unit is sold and the building has passed a final inspection. Longevity of the components of the structure beyond the final turnover of the facility may not be a major motivating factor for the developer, meaning that the result of the application of false economies may be more detrimental to the end user, as opposed to the developer.

A false economy affects businesses and consumers on many levels. The quality of decision making is the factor here. The cause and effect of our decisions may be creating a false economy in our businesses or our personal lives. Anyone in the procurement profession (purchasing) who still holds onto ‘cheapest’ being their only option for purchasing from suppliers may be setting their companies up for failure or disaster.

For instance, many SME businesses may be tempted by the cheap telco service offering or cheaper equipment. On the surface, these cheaper offerings could appear to be great deals, but before one buys anything they should do some analysis beyond the obvious price on offer. Just because something is cheap does not mean it is good for you or your business. A cheap phone or communications system could mean unreliable phone or poor internet connection, poor equipment performance resulting in frustrated or lost customers who cannot communicate with you or your business, a poor reputation, or poor staff retention. The so called ‘cheaper’ service just cost you a whole lot more than you intended to pay.

The expression ‘buyer beware’ also springs to mind. It is not just the sales person’s job to convince us to buy it. Our job as the buyer is to do the math and to look at the genuine ROI (return on investment) of our purchase. Any self respecting sales person is well equipped to look at the consequences and ROI of each purchase, and would help you make a sound decision based on facts. We need to work together to ensure we do not enter into a false economy for all our sakes.

So what are we really purchasing? Thinking beyond the immediate outlay of money, we can view every purchase in our personal or business life as an investment. I have just had a salient lesson in false economy courtesy of my eldest son and his friend when they purchased some remote control products online. They found some great planes on a website whereby they could purchase them at a considerably cheaper price than elsewhere. Seeing as they were paying for them with their hard earned pocket money, the price looked great to them.

You can see what’s coming can’t you? 8+ hours of my time attempting to communicate with the US online company to get our order processed involving numerous attempts to get what we ordered fully shipped. This was a classic case of false economy. Even though my son and his friend went through feelings of devastation at the thought of losing their collective $740, feelings of disappointment when their order was not fully filled and the shipping costs were out of proportion, and resignation that not everyone fulfills their promises, the lessons for all of us were invaluable.

They learnt about checking out the reputation and credibility of a company first, the cause and effect of buying and selling ‘cheap’, that trying to fix problems can take a lot of time and cost money, and that plenty of people have lost a lot more than they did. So we were able to put it into perspective, albeit that $740 to an 11 and 13 year old is a lot of money. They also discovered the value of thinking before you act, the consequences of actions, and how to process a range of emotions that we feel when things go wrong. Perhaps most importantly, they learnt how to respond with patience and reasoned analysis to get what you want rectified, instead of threats.

All in all it was a great lesson, learnt early in life with limited consequences, and hopefully one they will carry with them into the future to help them on their way.

So if using a cheaper alternative costs you even one sale, is it worth it? While in some cases the answer may be yes, in many other cases the more expensive option may be the one that provides the greatest return for you. As you’ve just read, ‘costs’ can involve a lot more than just dollar value.

Special thanks go to my son Josh and his friend Nick for the inspiration for this article.

'Selling is everybody's business and everybody lives by selling something' so says Sue Barrett, sales expert, writer, business speaker and adviser, facilitator, sales coach, training provider and entrepreneur. Sue founded Barrett in 1995 to positively transform the culture, capability and continuous learning of leaders, teams and businesses by developing sales driven organisations that are equipped for the 21st Century. Since inception, Barrett has worked with hundreds of Australian companies c...